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Three mutual funds -- Reliance MF, ICICI Prudential MF and Invesco MF -- have decided to withheld last month’s trail commissions to distributors for those folios where the KYC-compliance is not complete. The MFs have sent the communication to distributors following a recent inspection report by the Securities and Exchange Board of India (Sebi) where it highlighted 25 violations and demanded corrective actions.

According to a communication by Reliance MF, a copy of which is with Business Standard, "... based on recent Sebi advise for investors where PAN/KYC is not available, we have kept your trail commission (if any) on hold for such folios," the fund house told its distributors.

Reliance MF added the trail commission will be paid out once the necessary changes are made.

ICICI Prudential MF told distributors that it would hold commissions for folios where the address details and pin code were incorrect or incomplete. In its communication, the fund house said investors can submit complete address by submitting the KYC form along with supporting documents.

Invesco MF in its communication told distributors, “Sebi in its letter dated July 9, 2018, to Association of Mutual Funds in India (Amfi) has communicated that distributors need to ensure KYC documents are complete, failing which AMC should withhold its commission to such distributors. We request you to complete KYC documentation for all your investors to ensure timely release of commission payments.”

According to people in the know, more fund houses could also hold back trail commissions for folios where KYC-compliance is not complete.

Distributors say they should have been given more time. "Sebi and Amfi should have given a few months to distributors to complete all the KYC details of their clients. The responsibility for KYC-compliance is not of distributors alone, but AMCs and Registrars are equally responsible. Why should only distributors be penalised," said Srikanth Matrubai, CEO of SriKavi Wealth.

As reported by Business Standard, in a recent letter to heads of asset management companies, Sebi had taken adverse view of certain violations it found in its inspection of fund houses between April 2014 and March 2016. The regulator warned the asset management companies against these practises.

One of the practises highlighted by the regulator was paying of trail commissions before KYC is complete in all respects.

Certain players in the industry have also recently written to Sebi, requesting a formal circular on the maximum commission to be paid to mutual fund distributors, so that there is no regulatory grey area that can get exploited by any entity.

On Wednesday, Sebi officials met officials of the industry body Amfi and informed them that the regulator was aware of cases of excessive commissions being paid out; which were much higher than Amfi’s ‘best-practices’ guidelines.